Your retirement account provides a nest egg for the later years of your life. As this investment continues to grow, it is important to understand how to withdraw retirement funds once the time is right and the need arises. Because there are very specific rules governing IRA distributions, some research is important so that you make your retirement withdrawal according to those rules. You need to know when you can begin taking money from your account and the best way to manage your withdrawals to maximize the tax benefits. As with any financial decisions, you should consult with an accountant or other tax professional for assistance.

Steps

Part 1

Withdrawing Retirement Money Before Age 59 1/2

1

Know how to withdraw from your 401(k) or 403(b) accounts. Money that you invest through your employer into a 401(k) or 403(b) account is invested tax-free. As a result, there are limitations on withdrawals. If you withdraw early from one of these accounts, before you reach the age of 59 1/2, you will be charged a 10% penalty on the withdrawal. There are exceptions that can allow you to withdraw from your account without paying this tax penalty. The exceptions are:[1]

Separation from service. This term basically means that you are no longer working, through layoff, termination, quitting or retiring. You must be at least 55 for this exception to apply.

Withdraw from your traditional IRA. A traditional IRA is a retirement account that individuals are allowed to establish outside of the employer relationship. Money that you invest in a traditional IRA is expect to remain, as with 401(k) and 403(b) accounts, until you reach the age of 59 1/2. If you withdraw before this time, you will be charged a 10% federal tax penalty. However, you may be able to avoid the penalty if one or more of the following exceptions apply to you:[2]

First-time home purchase. You may withdraw up to $10,000 for some types of home purchases, without penalty.

Educational expenses. Some educational expenses for yourself and your immediate family may be paid without tax penalty.

Disability or death. If you are permanently disabled, you may withdraw without penalty. In case of your death, your beneficiaries may withdraw the funds without penalty.

Unreimbursed medical expenses. You may withdraw up to 7.5% of your adjusted gross income to pay unreimbursed medical expenses.

Periodic payments. You may be able to arrange a schedule of periodic withdrawals over time that can avoid the tax penalty.

Involuntary distributions. If you must use the money to pay an IRS tax levy, you may do so without penalty.

Reservist withdrawals. Members of the National Guard or reserves who are called to duty for more than 180 days may make withdrawals without penalty.

3

Withdraw more freely from a Roth IRA. Money is invested into a Roth IRA after paying taxes on it, so the withdrawal rules are more generous. You may withdraw your invested money at any time, in any amount, without tax penalty. There are some limitations to withdrawing the earnings (interest and investment income) from a Roth IRA. If you withdraw the earnings from a Roth IRA prior to age 59 1/2, you will be charged the 10% tax penalty, unless one of the following exceptions applies:[3]

Periodic payments. If you take a series of substantially equal payments, you can arrange for these to be free of the tax penalty.

Unreimbursed medical expenses. You may withdraw up to 7.5% of your adjusted gross income to pay unreimbursed medical expenses.

Medical insurance premiums. If you use the money to pay medical insurance premiums after losing your job, you will be free of the tax penalty.

Education expenses. You may take distributions free of a tax penalty to pay higher education expenses for yourself or your immediate family.

IRS levy. If you are required by the IRS to withdraw the money to pay a tax levy, the money will not be subject to the withdrawal penalty.

Reservist withdrawals. Members of the National Guard or reserves who are called to duty for more than 180 days may make withdrawals without penalty.

Disaster recovery. In some circumstances, if you need the money to recover from a qualified disaster, you may withdraw without penalty.

4

Cash out your retirement plan when you leave your employment. When you leave your current job, you may also be able to cash out your retirement account. However, doing so will also result in a 10% tax penalty, unless you qualify under some other category for an allowed, non-tax early withdrawal.[4]

For example, suppose you have been with a company for a number of years, and you have built up a retirement account of $50,000. If you elect to cash out this account when you leave the company, you will be required to pay a tax penalty of $5,000.

Part 2

Planning Your Retirement Withdrawal Amounts

1

Take optional withdrawals between ages 59 1/2 and 70 1/2. After age 59 1/2, you are allowed to withdraw funds from your retirement accounts without paying a tax penalty. However, you are not required to do so at this time. You may leave the money untouched in the account, accrue interest and continue making contributions.[5]

2

Consolidate multiple retirement accounts. People often may accumulate multiple retirement accounts, if they have worked for several different companies over the course of their career. It can be cumbersome or inefficient to manage multiple accounts in your retirement years. To simplify the process, it is a good idea to consolidate your multiple accounts into a single IRA, and then make withdrawals from that single account.[6]

Some restrictions exist about the types of accounts that can be combined. You should talk with an accountant or the manager of your retirement accounts for assistance.

3

Calculate withdrawal amounts to make your retirement money last. If you begin making retirement withdrawals at age 59 1/2, you could have an estimated life expectancy of about another 30 years. To make your money last this long, you should begin with a withdrawal of 4% of the balance of your account. From then on, adjust the amount of your withdrawal by the rate of inflation.

For example, suppose you wish to retire at age 59 1/2, with a total of $100,000 saved in one or more retirement accounts. This recommendation would say that you should withdraw $4,000 in the first year of your retirement.[7]

4

Withdraw from your accounts in a “tax-efficient” order. If you have different types of retirement accounts, you should plan to withdraw from them in a particular order to maximize the tax benefits.[8]

Withdraw first from taxable accounts. This will decrease the balance in the account and therefore decrease the amount of tax that you will be required to pay.

Withdraw next from tax-deferred accounts, such as an employer’s pension plan or a traditional IRA.

Finally, withdraw from non-taxable accounts. Because these accounts are not taxed, you want to maximize the balances you leave in them to save the most in tax payments.

Part 3

Making Required Minimum Distributions from your Retirement Funds

1

Begin your minimum distributions, if required, when you reach 70 1/2. For most employee pension plans, IRAs, 401(k) and 403(b) retirement plans, you must begin taking withdrawals, known as minimum required distributions (RMDs), by April 1 of the year after you turn 70 1/2 years old. Each year thereafter, you must take the RMD by December 31.[9] Roth IRAs, however, do not have required distributions until after after the owner dies (meaning that you could theoretically leave money in a Roth IRA if you don't need to withdraw it, and leave it for your heirs).[10]

For example, if you were born on May 1, 1946, then you turned 70 on May 1, 2016, and 70 1/2 on November 1, 2016. If your retirement plan involves RMDs, then you must take the first one by April 1, 2017. You are then required to take the RMD by December 31 of each following year.

Failing to make the RMD by the deadline can result in a tax penalty of up to 50% of the amount of the distribution.

2

Find the balance of your retirement account. To calculate the RMD for a given year, you must first know the balance of the account. This is measured as of December 31 of the previous year. For example, if you are calculating your RMD for 2016, you will need to determine the balance of your retirement account on December 31, 2015.[11]

If you had any rollover into your retirement account from a Roth IRA after December 31, you will need to add this amount to the balance. For example, if your retirement account balance was $70,000 on Dec. 31, and you later rolled over $15,000 from a Roth IRA, then you will use the sum of $85,000 as your account balance.

3

Find your IRS Distribution Period number. The IRS provides a worksheet for calculating your RMD based on your age. This worksheet is available at https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf. Using the table on that worksheet, you will locate your age and the corresponding Distribution Period number. The numbers decrease on a sliding scale, beginning at age 70 and going through age 115 and above.[12]

For example, someone making his or her first RMD at age 70 will find a Distribution Period number of 27.4. Someone calculating the RMD at age 80 will use the table to find a Distribution Period number of 18.7

4

Calculate your RMD. To find the amount of your RMD, divide your account balance by the IRS Distribution Period number. The result of this calculation is the minimum amount that you must withdraw from your retirement account.[13]

For example, suppose your retirement account balance is $85,000, and you are making your first RMD at age 70. This will have a Distribution Period number of 27.4. Therefore, your RMD is $3,102.19.

You are allowed to withdraw more than the calculated minimum amount, if you wish.

Report your retirement withdrawal when you file your taxes. When you take your retirement distribution, the bank or other facility holding the account will issue you a 1099-R form. You will use this form to report the withdrawal as part of your tax return.[14]

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Warnings

Some banks may also assess their own penalties on early withdrawals from retirement accounts. Talk to the institution or fund manager to find out the specific rules regarding your account before making a retirement withdrawal.

The rules regarding IRA distributions are very specific and must be followed to the letter to avoid tax penalties. If you are unsure how to make your retirement withdrawal, talk to a tax accountant about the best way to complete and report your transaction.